Chile's

Chil ' Tax

T Treaties
T ti
Network: United
States next!
Liselott Kana

Miami December 2010

Foreign Direct Investment Foreign Direct Investment
in Chile (DL 600) from Chile to other
Total 1974-2009: countries
US$74,901 millions Total 1990-2010:
US$54,226 millions

Uruguay
Spain
Others 1%
France 1% Others
Mexico 11 4%
11.4% Venezuela
2% USA 7%
2% 1%
26% Cayman
Netherlands Islands
2% 2% Argentina
Italy
Panama 30%
3%
Japan 1%
3% USA
Australia 7%
5%
Spain Colombia
19% 13%
UK
Canada Peru Brazil
9%
17% 17% 20%

Source: Foreign Investment Committe (www.cinver.cl) and Direcon

(www.direcon.cl)
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 Chilean Double Taxation Treaties
In Force Before Congress Negotiation
Argentina Brazil Australia concluded
Colombia Ecuador United States South Africa
Paraguay Peru
Awaiting approval in
Canada Mexico the other country:
Russia
Belgium Croatia
Denmark France
Ireland Poland
P t
Portugall N
Norway
Spain Sweden
Switzerland UK

Malaysia South Korea

New Zealand Thailand

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 Trade policy elements

 Open economy

 Dependent on international trade

 Small country

 Transparent

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 Options

 Multilateralism

 Plurilateralism or regionalism

 Bilateralism

“All of them”

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Stock-Foreign Direct investment/BNP
2008
%
Brazilil 19
9
Chile 60
China 9
Check Republic 53
Ireland 64
Mexico 27
South Africa 43
Spain 16
United States 35
World average 25

S
Source: UNCTAD (www.unctad.org)
( t d )

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Chile´s future....


 
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 FTA and Taxation

 NAFTA and Chile

 FTA with high standards

 Taxation provisions in the FTA

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Chile has used different ways to deal with
barriers of double taxation …

- First tax agreement with Argentina 1976

- Credit system - 1993
- Policy decision to negotiate Tax treaties

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 Tax treaty negotiations

 Chile signs its Tax Treaty with Canada (1998)

 As
A off Nov
N 2010:
2010 24 in
i force
f 3 signed
i d
 US negotiation process

First contact – Informal meeting in July 1998

 Developments
D l t in
i 2009
 Final meeting December 2009

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Economic relations with the United States

 Free Trade Agreement (in force since 1 Jan 2004)

 Double Tax Agreement (signed Feb 2010)

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 Basics of a Tax Treaty

 What is double taxation?

 How do you avoid it?
 Structure of a Tax Treaty

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 Some issues in the treaty

- Persons and taxes covered

- Investment – Chilean clause dividends
- Interest
- Royalties
R lti – OECD commentaries
t i
- Services – permanent establishment
- Employees
l
- Pensions

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 Persons covered by the Treaty

- Concept of Resident
- Subject
S bj t tot tax
t
- Citizen´s taxation in US tax treaties
- Double residency – consequences
- Charitable organizations - Protocol
- Pension Funds - Protocol

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 Investment

Olives US Inc Investing in the US

-What type of income will I receive?

-How do I realize the investment from

Chile?

-Financing?

-Formalities?
Formalities?

-How will I be taxed?

Aceitunas
-Do
Do I get credit for the tax paid in the other
Chil S.A.
Chile SA country?

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 Withholding rates - Dividends
Dividends
g rate in US
Residents in Chile – Withholding
5% - owner holds more than 10% stock
5 % - all other cases
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Pension Funds are exempt

Residents in US – Withholding rate in Chile

Chilean exemption clause

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 Dividends (from the US to Chile)
United States corporation without with
tax treaty tax treaty

Profit before tax 1000 1000

Corporate
p tax ((35%)) ((350)) ((350))
Dividend to be remitted 650 650

Withholding tax (30%) (195) (5%) (33)

Dividend received 455 617

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Dividends (from Chile to the US)

Dividend received by a resident in United States

Net income in Chile 1.000
First category tax (Business profits tax 17%) (170)
Dividend payment 830
Additional or Withholding g tax calculation
Tax base (830 + 170) 1.000
Additional tax (35% x 1000) (350)
First category tax 170
Tax to be ppaid on distribution 180
Dividend payment 830
Tax to be paid on distribution 180
Dividend received 650

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 Investment

Olives US Inc In the US:

Olives US Inc pays corporation tax of 35%

Dividend
Dividend withholding on distribution:
5% or 15%
5% withholding (ownership of 10% or more)

15% withholding in all other cases

Investment in In Chile:
the US
Aceitunas Chile S.A gets a credit for US
taxes paid, including part of underlying tax
Aceitunas
Chile S.A.

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 Withholding rates - Interest

Interest

Without Treaty With Treaty

Chilean paying to United Chilean paying to United

States: States:

Banks - 4% Financial Institutions - 4%

Enterprise - 35% Enterprise - 10% (first 5
years 15%)

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 Interest

Paying interest to the US

Eagle
g
Insurance Without Tax treaty:

4% - 4% and 35%
Eagle Bank
Eagle Inc With Tax treaty:
4% 10%
- 4% - financial institutions

- 10% (first 5 years - 15%)

Técnica
Credits?
Chile S.A.
Deductible costs?

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 Withholding rates
Royalties

- 2% equipment rentals

- 10% all other types of royalties as defined

- Computer software
- Most favored nation treatment

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 Royalties

Research Inc
Research Inc develops a formula for the
use by Técnica which pays for the right to
Develops a use that formula. Payments from Chile to
US.
formula for
Payment
th use b
the by No tax treaty: Withholding tax in Chile 30%
to the US
Técnica
With tax treaty: Withholding tax max 10%

Credits?

Técnica Deductible costs?

Chil S.A.
Chile SA

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 Services
Services performed by a US company in
the US for a Chilean company. Payments
Service provider from Chile to US
i the
in th US Is there a permanent establishment in
Chile?

Services Payment No, no PE in Chile:

performed to the US
- Payments covered by Business profits (art
for Técnica 7) only taxed in the US
Chile S.A - No W/H in Chile.

Yes, there is a PE in Chile:

Técnica - Tax consequences under domestic law in

Chile, Tax Law (DL 824)
Chile S.A. a) PE income (Art. 58 N° 1)
b) W/H on gross (Art. 59 N° 2)

Tax payer have the right to deduct

expenses but must comply with
administrative filing requirements. 24
TAXATION OF A DUAL RESIDENT INDIVIDUAL

Facts:

• The taxpayer is a national of Chile and a resident of Chile for

taxation purposes.
• The taxpayer is a resident of the US for US taxation purposes.
purposes
• The taxpayer is employed by a company that is a non-resident
of Chile; the taxpayer has been employed by the company for
several years; the taxpayer's employment is based in the US
and it does not require the taxpayer to travel to Chile.
• The
Th ttaxpayer receives
i employment
l t iincome from
f his
hi employer
l
in the US.

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TAXATION OF A DUAL RESIDENT INDIVIDUAL

Facts (continued):
•The taxpayer owns a residence in Chile and has recently
purchased a residence in the US. Both residences are available to
him at all times continuously.
The taxpayer spends a similar amount of time in Chile and the US
•The
during the year.
• When the taxpayer returns to Chile he resides with his wife.
•The taxpayer is a member of the Golf club located near his
residence in the US.
Th ttaxpayer h
•The has a ffamily
il member
b iin th
the US.
US
•The taxpayer maintains a home loan with a Chilean bank. The
taxpayer
p y maintains US credit card accounts and owns US shares &
options.
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TAXATION OF A DUAL RESIDENT INDIVIDUAL

Criteria for the Tie Breaker rule:

When the individual has double residency:
- Permanent home
- Centre
C t off vital
it l interests
i t t
- Habitual abode
- Nationality
N ti lit

If unresolved…
- Mutual agreement procedure

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 TAXATION OF A DUAL RESIDENT INDIVIDUAL

Does the individual have a permanent home in one or

both States?

YES
NO
Does the individual have a permanent home in Individual is a resident of the State
the two States? where he/she has a permanent home

NO YES YES Individual is a resident of the State

Can the State where the individual has his/her where his /her centre of vital interests is
centre of vital interests be determined? located

NO
YES
Does the individual normally stay (“have an Individual is a resident of the State
habitual abode”) in only one of the two States? where he/she has an habitual abode

NO
YES Individual is a resident of the State of
Is the individual a national of only one of the two
States? which he/she is a national

NO

The competent authorities shall settle the

case by mutual agreement

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 Employment Income

Salaries derived by a resident individual who is a

resident
id t off Chil
Chile iin respectt off an employment
l t shall
h ll be
b
taxable only in Chile unless the employment is exercised
in the US (the other Contracting State) when the US may
tax that salary.
Unless:
-Present
ese in the
e US for
o less
ess than
a 183
83 days
-Remuneration is paid by non US resident employer
- Remuneration is not borne by PE in the US

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 Pensions

 Pension payments under Chilean

social security law (DL3500) only
taxable in Chile
 Contributions
i i to the other states'
pension scheme are deductible

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 Thank you

Website: www.sii.cl
Liselott Kana: lkana@sii.cl

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